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Why Is Australia Better Than Canadian Trade

834 Words4 Pages

Canada and Australia are (mainly) English-speaking countries with populations that are not too different in size (Canada’s is 60% larger). But Canadian trade is twice as large, relative to GDP, as Australia’s. This is because, besides GDP, distance also matters when it comes to trade volume between countries, according to the gravity model. And, unlike Canada, Australia is located very far away from others, especially major economies like the U.S. That is why Canada is more attractive in terms of trade due to lower transportation costs. 2. Based upon the gravity model, it makes sense that Mexico trades mainly with the U.S., while Brazil trades equally with the U.S. and E.U. This is because Mexico is very close to the U.S., yet quite far from …show more content…

Equation (2.1) says that trade between any two countries is proportional to the product of their GDPs. However, this does not mean that if the GDP of every country in the world doubled, world trade would quadruple, yet double instead. This is because each country's total percentage of trade increases proportionally and the share of world income and spending in each country does not change. As an illustration, there are two countries. Country A has a GDP of $6 trillion and B has a GDP of $4 trillion. The share of world spending on each country’s production is proportional to each country’s share of world GDP. To simply put, see the below …show more content…

Thus, exports from country B to country A are equal to $6 trillion x 40% = $2.4 trillion. Country B has an income of $4 trillion and spends 60 percent of this on country A’s production. So, exports from country A to country B are equal to $4 trillion x 60% = $2.4 trillion. Total world trade then equals $2.4 trillion + $2.4 trillion = $4.8 trillion. Now, if doubling their GDPs, GDP in country A is $12 trillion, and GDP in country B is $8 trillion. Since the share of world income and spending in each country has not changed, country A will still spend 40 percent of its income on country B’s products, and country B will still spend 60 percent of its income on country A’s products. Exports from country B to country A are equal to $12 trillion x 40% = $4.8 trillion. Exports from country A to country B are $8 trillion x 60% = $4.8 trillion. Total trade is now equal to $4.8 trillion + $4.8 trillion = $9.6 trillion. Looking at trade before and after the doubling of GDP, it can be clearly seen that total trade actually doubled, not

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